Volume 3/2015
Issue (2)/ June 2015
ISSN 2344-102X
ISSN-L 2344-102X
RELATIONSHIP BETWEEN CONSERVATISM AND
INCOME SMOOTHING
Shaban MOHAMMADI1*, Mahmoud Lari DASHTBAYAZ 2
[1] Department of Accounting, Hakim Nezami University of Quchan , Quchan, Iran
[2] Ferdowsi University of Mashhad, Mashhad, Iran
Abstract
In researching this article, the relationship between conservatism as one of the qualitative
characteristics of accounting information and income smoothing discuss and try to answer this
question is that, if firms bankrupt the smoothing action figures profit as compared to the nonbankrupt firms have more conservative behavior in financial reporting?
Keyword: Income smoothing, conservative, bankrupt companies, profit and loss
JEL Classification: M41
I. Introduction
The growing size and complexity of their growing economic activity on the one
hand and the need for accurate information regarding the accounting and financial
reporting on the other hand, leads to important institutional changes in thinking and
theories of accounting and the rise analytical methods and modern management
accounting is. One of the most important changes in emphasis and attention gains and
losses that were previously on the balance sheet, which was leading to something called
earnings management. Earnings management as a conscious process steps within accepted
accounting principles for a profit report the level of interest is defined. Reported operating
profit close to the target profit level through accounting manipulation is performed. One
of the purposes of manipulation, income smoothing is reported. Therefore, income
*
Corresponding author: Shaban MOHAMMADI, E-mail:[email protected]
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smoothing can be considered part of earnings management through accounting
manipulations to do that can have a significant impact on the quality of financial
reporting.
On the other hand, conservative financial reporting is a common characteristic,
can be understood as an approach to lack of confidence in the financial reporting process
as challenges, which, however, does not stand in accounting principles, but can have a
significant impact on the valuation of assets and the determination of net income. Terms
conservatism this concept is often used in accounting for assets and liabilities and
revenues and for the least amount possible fees may be paid to the report. Conservatism
also means that should cost as much as possible later (or earlier) were identified. Hence,
the assumption is that much better than pessimism in financial reporting optimism. The
International accounting standards board's conceptual framework (IASB), as defined
conservatism that "should not overstate assets and liabilities and revenues and expenses is
shown below.”The board theoretical framework discussed above, suggests that
conservative than the show deliberately overstating income and assets and liabilities and
costs also does not permit the deliberate will, because in this case, the objective of
financial statements is not the reliability and quality would not be proper. Therefore,
earnings management due to lower revenues from the show deliberately and intentionally
overstating the cost can be an apt description of conservatism (Manuel et al., 2005).
Cohen et al (Kohen et al., 2007), a study of earnings management after Sarbynz Oxley
Act (SOX) concluded that the level of earnings management after the application of the
law is reduced. They also found that in the course of applying the law of real earnings
management has increased, while Zhou and Beet in 2006, found in his research,
companies that provide a conservative financial reporting could have more earnings
management behaviour. The Zhou, the companies that provide a conservative financial
reporting, pay less earnings management (Zhou, 2008). Since the concepts of accounting
conservatism and smoothing different applications for financial reporting, and each one
can be alone significant impact on the quality of financial reporting and thus market
efficiency investment behaviour of investors, creditors, analysts and the general users of
financial statements have, therefore, concluded that the study the relationship between
these two components useful step toward completing the literature on the economic
environment of the capital market in Iran.
Since previous research has been approved by the directors of insolvent
companies during bankruptcy to protect themselves in the capital markets to smooth
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income figures are, therefore, the following question in mind that the researcher led to
research on the relationship between conservatism and income smoothing component of
bankrupt companies were active in Tehran stock exchange. Is bankrupt companies that act
to smooth the profit figures (losses) are compared to the non-bankrupt companies, a more
conservative behaviour in financial reporting?
II. Measure of conservatism
According to Gregory and liquids (Gregoriou & Skerratt, 2007), introduction of
accrual accounting provides a context for applying conservatism. For example,
conservative application requires to store inventory or investment losses, depreciation
factor. The identification of these losses and reserves associated with reduced profit
accounting, but no effect on cash flows. So naturally items and cash flows should be
applied to the conservative influence. Gyvly and Hine (Givoly & H ayn, 2000), focusing
on a specific definition, non-operational accruals (optional) for were used to measure
conservatism.
As described above, when the identification and reporting conservatism events the
first applies to financial management and inevitably faced with ambiguity and uncertainty
of selecting a choice between two or multiple choice, and second, how to select and run
the lowest possible lead to retained earnings. Gyvly and Hine because of accruals and
discretionary (non-operational) that on the one hand, accrual accounting conduit for
applying conservative and on the other hand, the power exercised by the directors in the
absence of certainty, about the rise of conservatism provides. Total accruals and
discretionary accruals (non-operational) is calculated as follows:
ACCit = (NIit + DEPit) - CFOit
OACCit = Δ (ARit + Iit + Pit) Δ (APit + TPit)
NOACCit = ACCit - OACCit
ACC = total accruals
I = Inventories
NI = net Income before extraordinary items
AR = accounts receivable
DEP = depreciation
P = advance
CFO = operating cash flow
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AP = accounts Payable
OACC = operating accruals
TP = taxes payable
NOACC = (non-operational accruals (optional
Gyvly and Hine results from each year that passed, non-operational accruals from
the previous year were significantly negative (smaller) is. Accordingly, they concluded
that, over time, is more conservative. This means that over time, managers have chosen
ways to minimize the cumulative profit led. It is also the top model, worth noting that the
lower accruals are non-operational, would be more conservative.
III. Analysis of results
Hypothesis 1: bankrupt companies’ smoothers profit in the profit margin
conservative act. As seen in table 1, the correlation between variables is equal to 0.38
indicates a weak correlation between conservatism and income smoothing is very much in
line. On the other hand, since the value of pi (P), 0.0568 and more than 0.01 alpha, so the
hypothesis of no correlation between bankrupt companies smoothers profit (loss) in the
profit (loss) margin of conservatism can’t be denied. In other words, with a 99 percent
chance of bankrupt companies’ income smoothing in the Profit margin behave more
conservative.
Hypothesis 2: bankrupt companies, non-profit (loss) of the Income conservative
operating margin. As you can see in table 2, the correlation between variables is equal to
0.86 and going in different directions, indicating a strong correlation between
conservatism and companies are non-profit. On the other hand, since the value of pi (P),
0.0007 and alpha of less than 0.01, so the hypothesis of no correlation between bankrupt
companies, non-profit (loss) in the profit (loss) margin of conservatism is rejected. In
other words, the probability of a 99% interest in the non-bankrupt companies Profit
margin conservative act.
Hypothesis 3: bankrupt companies smoothers gains (losses) on interest rates
before conservative act. As in table 3 below, the level of correlation between variables is
equal to 0.5, which indicates a moderate correlation between conservatism and smoothers
much in line with earnings. On the other hand, since the value of pi (P), 0.0198 and more
than 0.01 alpha, so the hypothesis of no correlation between bankrupt companies
smoothers gains (losses) on interest rates before and conservatism can’t be denied. In
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other words, with a 99 percent chance of bankrupt companies’ income smoothing in the
profit before behave more conservative.
Hypothesis 4: bankrupt companies, non-profit (loss) in the profit before
conservative act. As you can see in table 4, the correlation between variables is equal to
0.61, which indicates a relatively strong correlation between conservatism and
corporations, non-profits and going in different directions. On the other hand, since the
value of pi (P), 0.006 and less than alpha 0.01, so the hypothesis of no correlation between
bankrupt companies, non-profit before and conservatism rejected. In other words, with a
99 percent chance of bankrupt companies and non-profit in the profit before conservative
act.
Hypothesis 5: bankrupt companies smoothers Profit in the Profit particularly
conservative act. As seen in table 5, the correlation between variables is equal to 0.52
indicates moderate correlation between conservatism and income smoothing is very much
in line. On the other hand, since the value of pi (P), 0.03 and 0.01 is greater than alpha, so
the hypothesis of no correlation between bankrupt companies smoothers profit (loss) in
the profit (loss) is not particularly conservative rule. In other words, with a 99 percent
chance of bankrupt companies’ income smoothing in the Profit Special behave
conservatively.
Hypothesis 6: bankrupt companies, non-profit (loss) of the Income special act
conservative. As you can see in table 6, the correlation between variables is equal to 0.06,
which indicates a relatively strong correlation between conservatism and going in
different directions and the non-profit companies. On the other hand, since the value of pi
(P), 0.0061 and 0.01 is less than alpha, so the hypothesis of no correlation between
bankrupt companies, non-profit (loss) in the profit (loss) for the conservative rejected. In
other words, the probability of a 99% interest in the non-bankrupt companies Profit
particularly conservative act.
IV. Content
In order to study the logical answer to the question whether the directors of
bankrupt companies who try to smooth income figures are conservative have more or
managers non? To answer this question, correlation between variables through the
Pearson correlation test, the relationship between smoothers companies profit for
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companies with conservative and non, at three levels: profit margin, operating and special
it's done.
According to the results of the above tests, it was determined that no significant
differences in relation to associated companies and accounting firms to conservative non
smoothers are the conservatives. In other words, we can say that in each of the three levels
of earnings, there is no relationship between income smoothing (loss) by the conservatives
in bankrupt companies there, and while this is exactly the picture above is true for nonfirms. This means that in each of the three levels of profitability, it was found that
bankrupt firms that are not smooth out your profit and loss figures, the more conservative.
Finally, with regard to the results of previous research that income smoothing
behavior were proved in bankrupt companies, as well as adding the results previous
research results it can be concluded that managers of bankrupt companies to maintain
itself in the capital markets (with Given the present circumstances, the company's
bankruptcy) is a system of one of the variables smoothing or conservative attempt to
influence the profit and loss figures themselves, to achieve their goals fashion they
concluded that the results of the study in 2008, Zhou said, companies are more
conservative financial reporting provided they pay less to earnings management, conform.
Table 1- The results obtained from the test hypothesis 1
The test
statistic
Tstatistics
The
amount
Statistics
T=2/0014
degrees
of
freedom
PValue
a factor of
importance
Value
Possibility
correlation
coefficient
24
0/0568
0/01
0/99
0/3782
Table 2- The results obtained from the test hypothesis 2
The test
statistic
Tstatistics
The
amount
Statistics
T=5/0121
degrees
of
freedom
PValue
a factor of
importance
Value
Possibility
correlation
coefficient
9
0/0007
0/01
0/99
0/585
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Table 3 - The results obtained from the test hypothesis 3
The test
statistic
Tstatistics
The
amount
Statistics
T=2/5439
degrees
of
freedom
PValue
a factor of
importance
19
0/0198
0/01
Value
Possibility
0/99
correlation
coefficient
0/5
Table 4 - The results obtained from the test hypothesis 4
The test
statistic
Tstatistics
The
amount
Statistics
T=3/1264
degrees
of
freedom
16
PValue
a factor of
importance
Value
Possibility
correlation
coefficient
0/006
0/01
0/99
0/6158
Table 5 - The results obtained from the test hypothesis 5
The test
statistic
Tstatistics
The
amount
Statistics
T=3/0063
degrees
of
freedom
24
PValue
0/03
a factor of
importance
0/01
Value
Possibility
correlation
coefficient
0/99
0/52
Table 6 - The results obtained from the test hypothesis 6
The test
statistic
Tstatistics
The
amount
Statistics
T=2/4911
degrees
of
freedom
11
PValue
a factor of
importance
Value
Possibility
correlation
coefficient
0/0061
0/01
0/99
0/06
100
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ISSN 2344-102X
ISSN-L 2344-102X
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